Waiting for the bond bubble to pop

Junk bond yields have never been this low. And the Federal Reserve's moves have helped make it a great time to be a borrower.

Lenders are not only doling out lower rates but in the case of refinancing, they're also willing to let companies skip out on most covenants that attach strings to how much a company must earn to stay up to date with these loans.

Those loans, known as covenant light loans, are nearing levels last seen during the financial crisis.

Leon Black, the chairman and CEO of private equity firm Apollo Group, said investors have completely forgotten lessons learned from the financial crisis, when many of those loans imploded.

"There is no institutional memory," Black told a panel at the Milken Institute Global Conference this week.

Lenders are willing to do "very unique things" to stay in the bond market, said Soren Reynertson, managing general partner at GLC Advisors, who also spoke at the conference.

It's not clear how much longer the credit bubble can keep expanding, but the higher the market moves, warns Sri-Kumar, the sharper the drop-off, because the economy simply can't sustain its anemic growth rate without the unprecedented level of intervention by the Federal Reserve.

"It's pretty clear that the markets are being artificially inflated by Fed stimulus or the steroids they've put into the system," noted Justin Slatky, a senior portfolio manager at high-yield hedge fund Shenkman Capital Management.

The Fed will have to stop the music at some point and start increasing interest rates. But until then, banks, companies, and hedge funds seem more than willing to keep dancing.